Why India’s Online Grocery Battle Is Heating Up

online groceries

Earlier this year, India’s largest e-grocer, BigBasket, received $300 million in funding led by China’s e-commerce giant, Alibaba. This is the biggest investment raised by the company since it started operations in 2011 and values it at around $950 million. BigBasket cofounder and CEO Hari Menon says the money will be used for “Growth. Growth. Growth.” According to Menon, BigBasket’s backend is “a well-oiled engine.” The investments over next 18 months, he says, will be in marketing, infrastructure expansion and technology like user interface improvements and advanced analytics.

This growth will translate to two key numbers, says Menon. Rs. 300 crore ($45 million) revenue in the month of September 2018 and Rs. 500 crore ($75 million) revenue in March 2019. “This will take the company to an exit revenue run rate of Rs. 6,000 crore ($900 million). We are advancing this goal by one year,” he adds.

Menon’s haste is not surprising. There is a big battle brewing in India’s e-commerce market. For over a year now, there has been talk of Walmart, the world’s largest retailer, taking a stake in India’s largest e-tailer, Flipkart. The buzz has grown. There is also talk of the global e-commerce giant Amazon, which is currently the second largest e-tailer in India, wanting to get a piece of Flipkart. While all three refuse to comment on speculations, media reports suggest that the deal between Walmart and Flipkart will be sealed soon. If it goes through, as expected, it will give Walmart a strong foothold in India, one of the fastest growing e-commerce markets globally. For Flipkart, it will mean additional arsenal against Amazon, which is betting big on India. One area that is expected to see a huge impact with any redrawing of the battle lines is online groceries.

“Grocery is the largest consumer segment by far; Indians spend more than 50% of their monthly income on groceries. It’s a must-capture space for all retailers, be it offline or online,” says Harminder Sahni, founder and managing director of consulting firm Wazir Advisors. “Grocery is a very hyper-local business. It is the logical next step for e-tailers once they have set up a strong delivery system and have a strong customer base,” says Sreedhar Prasad, partner, business consulting at KPMG India.

Grocery retail in India is estimated to be over 60% of the country’s total retail market. Analysts peg it anywhere between $400 billion to $600 billion at present with the potential to cross $700 billion by 2022. Online grocery is still small, but analysts see it as having huge potential. It is estimated to be around $500 million to a little over $1 billion currently and expected to cross $3 billion to $5 billion or even much more over the next three to four years.

It’s not just the size of the grocery pie that is attractive to e-tailers — it’s the stickiness. Groceries (and vegetables and fruits) are an essential purchase for every household. They are bought frequently and with a high repeat rate. Customers typically buy them without giving too much thought. The player that can capture the lion’s share of a customer’s mind share and wallet share in groceries can have a sharp edge over others; it can become the default e-tailer for other purchases, too.

“Grocery is a must-capture space for all retailers, be it offline or online.” –Harminder Sahni

Anindya Ghose, professor of information, operations, and management sciences and professor of marketing at New York University’s Stern School of Business, points out that even for online grocers, roughly one-third of their sales come from “non-food items” such as cleaning supplies and beauty products. In the real, bricks-and-mortar world, this number is about 15%. Ghose adds: “Online grocery typically attracts the most profitable customers: dual-income households, customers who prioritize convenience over price, and customers with high lifetime value. These are the kinds of customers e-commerce retailers should care about.”

The Amazon Factor

Take Amazon. The company’s stated vision is “to transform the way India buys and sells.” It also wants to be the ‘everyday’ and ‘everything’ store for its customers. “We see groceries as an important category to make e-commerce a part of the Indian customers’ everyday lives. Therefore, we decided to make grocery shopping more convenient and hassle-free for our customers,” says Sameer Khetarpal, director – category management at Amazon India.

Amazon launched its grocery offering in June 2016 with the Amazon Now app in Bangalore. (This started as a pilot in 2015 and was then called Kirana Now.) Through this app, customers can order a range of products — including fruits and vegetables, groceries, household essentials and personal care — and have them delivered within two hours. Last year, Amazon expanded this service to three more cities – Mumbai, Delhi and Hyderabad. Amazon has another format called Amazon Pantry which is available in 40 cities. Here, customers can order on the Amazon website and the products are delivered the next day.

“Amazon Pantry focuses on weekly and monthly stock-up shopping with a strong emphasis on increased savings to the customers,” says Khetarpal. In March, Amazon launched a network of 15 specialized fulfilment centers specifically for daily essentials to increase the speed of delivery. These fulfilment centers are equipped with temperature-controlled zones, a first for Amazon in India, to store and deliver perishables and frozen products.

Amazon’s programs for the grocery segment include “Super Value Day” and “Subscribe and Save.” The former, which takes place on the 1st and 2nd of every month — in line with customers’ habit of monthly grocery shopping on the first two days of a month — offers extra discounts. The Subscribe and Save program, where customers can create subscriptions for regularly bought items, offers both savings and convenience. These two options are available to Amazon customers across the country.

The company has also got the Indian government’s approval for a proposal to invest $500 million in food retail in the country. The approval allows Amazon to open fully-owned brick-and-mortar stores to sell food products in India. Satish Meena, senior forecast analyst at research firm Forrester, says cracking the grocery market is tough without an offline presence and expects Amazon to invest in an offline grocery firm in India. This would be in line with its acquisition of Whole Foods in the U.S. last year.

Flipkart is also reported to be eyeing the grocery space keenly. A few months ago, it did a soft launch for grocery delivery called “Supermart” on its mobile app for customers in Bangalore. This is Flipkart’s second attempt in this category. In 2015, it tried delivering groceries from neighbourhood stores, but that didn’t work out and Flipkart quietly exited. At present, the company is tight-lipped about its plans. Industry experts feel it is waiting to strike the deal with Walmart before making a big splash. “To remain the number-one online retailer in India, Flipkart is looking to expand beyond smartphones and fashion. The deal with Walmart can provide Flipkart the expertise of running offline stores, access to sellers and manufacturers, supply chain and the know-hows of selling groceries,” says Meena.

Expanding the Basket

BigBasket’s Menon claims to be unfazed by the looming threat. Competition, he says, will only grow the market. “Online grocery needs more players. It’s not easy, especially in the grocery segment, to move customers from the physical world to the online world. When the noise levels increase, more customers will move online. And with more players coming in, the market will expand rapidly.”

Menon believes BigBasket is in a strong position. It currently delivers around 70,000 orders per day across 25 cities, of which two (Bangalore and Hyderabad) are operationally profitable. Three more cites (Chennai, Ahmedabad and Kolkata) are expected to become profitable in the next quarter, and the rest are slated to be operationally profitable by year end. For the year ended March 2017, the company’s revenue was Rs. 1,400 crore ($211 million). For 2017-2018, Menon expects it to be over Rs. 2,100 crore ($317 million).

Menon lists “strong connect with the farmers, fresh produce (fruits and vegetables),wide range of groceries at very competitive prices, great quality, differentiated private label products, well-oiled and established supply chain and last mile delivery tailored to the grocery business,” as BigBasket’s key strengths and differentiators. Interestingly, close to 40% of BigBasket’s business is from private labels. This brings in much higher margins than is typical in the grocery business.

“The nuances and challenges of grocery e-commerce demand a specialist play.” –Ankur Bisen

The e-grocer’s two recent initiatives are a foray into the physical world through vending machines in residential apartments and office complexes, and offering a subscription model for products like fresh milk. Both are being piloted at present. Menon plans to install 10,000 kiosks over the next 24 months. Each machine, he says, will be unmanned and will have 24 to 48 products depending on the size of the apartment and office complex. The products will be daily essentials like fruits and vegetables, bread, eggs, dairy products, juices and snacks. These new moves are expected to increase the frequency of buying by customers. “Our vertical focus on the grocery segment helps us in becoming the destination of choice for online grocery buying. We will continue to remain focused on grocery and all our investments in supply chain, technology and infrastructure will remain in the grocery segment,” says Menon.

Will its vertical play help BigBasket to fight biggies such as Amazon and a Walmart-backed Flipkart? Currently, it is the market leader in e-grocery in India followed by Grofers — another vertical player with strong investors like the Japanese conglomerate SoftBank. Amazon is trailing in the third place. The Alibaba-backed Paytm Mall is also looking to increase its presence in grocery. In an interview with business daily Business Standard, founder and CEO Vijay Shekhar Sharma said he is looking to increase the contribution of the grocery business from 25% at present to 40% by the year end. Then there are a few city specific e-grocers like DailyNinja in Bangalore and Kada in Trivandrum. Over the past couple of years, some high profile e-grocers like PepperTap and LocalBanya have closed shop.

Ankur Bisen, senior vice president at management consulting firm Technopak Advisors, says Walmart’s proposed investment in Flipkart will be “a significant development,” but he expects that “for the next three years the space of Indian online grocery will continue to grow in the current construct.” Bisen explains: “Marketplaces world over usually struggle to make grocery e-commerce work. It has always been a vertical specialist, like Ocado in the U.K., to emerge as a category creator. The nuances and challenges of grocery e-commerce demand a specialist play that can’t be extracted from a generic marketplace model.”

The fact that the top two e-grocers in India are both vertical players, he says, validates that online grocery retailing is more challenging than it may appear. Bisen adds a caveat though; the situation may not remain the same going forward. “Leading e-commerce players understand these challenges and are throwing capital behind technology, improvisations and acquisitions to get online grocery right.”

Kartik Hosanagar, Wharton professor of operations, information and decisions, is bullish on BigBasket. Hosanagar has visited the company’s warehouse twice and says he is “impressed with its ventilation system, thermal protection systems, warehouse layout and product classification.” Hosanagar lists BigBasket’s supply chain efficiency, delivery system and customer analytics as its key strengths. For instance, BigBasket’s “inventory write-offs at 0.5% of gross revenue,” Hosanagar says, is “exceptional for an e-commerce business in India.”

Beyond Discounts

Hosanagar believes that Amazon’s usual strategy of increasing market share by deep discounting won’t be easy in groceries. First, margins are too low to be able to do that. Second, the big FMCG brands in India, he says, are likely to resist such efforts. According to Hosanagar, “while analytics and existing infrastructure” are huge advantages for Amazon, it doesnt have “as deep an understanding of groceries as the BigBasket folks, who have spent a lifetime in the industry they started.” (BigBasket cofounders were part of the founding team of Fabmart, one of India’s first e-commerce firms, in 1999.)

“Online grocery typically attracts the most profitable customers …. These are the kinds of customers e-commerce retailers should care about.” –Anindya Ghose

Hosanagar explains: “The grocery business is extremely challenging. Given its low margin nature, there is little room for mistakes or inefficiency. Winning in this market requires deep understanding of the grocery business, a highly efficient supply chain, low return rates, and sophisticated use of technology to both manage the supply chain and retain customers.” KPMG’s Prasad points out that unlike other categories, grocery is a local play and has to be built “city-by-city.” Adds Stern’s Ghose: “The logistics complexity and costs increase exponentially with assortment depth, and the customer will hardly pay that premium.”

According to Wazir’s Sahni, his mantra for success in this market is “long-term patient capital and robust and efficient supply chains.” He points out that unlike in U.S., where e-tailers have to take share from large format organized retailers, in India it is the small kiranas (neighborhood shops) that rule the market. “They thrive on a fragmented supply chain and micro markets. This is a tricky animal for online retailers to deal with.” Technopak’s Bisen points out that grocery is need-based shopping, and consumers look for convenience, price and choice. It is not an aspirational purchase that allows consumers to overlook these factors. According to Bisen, the very nature of this segment does not allow for the marketplace or aggregation model. “It needs an inventory model that allows complete visibility on the merchandise.”

Forrester’s Meena thinks otherwise. He says it will be difficult for pure-play e-grocers to compete against horizontal players like Amazon and Flipkart, which can “find ways to cover for the low margin category by selling other goods to the households.” He expects BigBasket to go for consolidation with an online or offline player.

Ghose is of the same view. Citing Amazon, he says it has made its mark in this space with the Whole Foods acquisition, and will “continue to destroy its competitors” by undercutting them on price. “Amazon has deep pockets to absorb these losses, but the other players will not be able to afford such drastic price competition for too long. This will force them to go out of business or make them likely targets for acquisition.”

KPMG’s Prasad, however, feels that the Indian e-grocery market is still nascent enough for both horizontal players and pure-play e-grocers to co-exist successfully. “Consolidation may happen later, but I don’t see it happening in the near future,” he says.

Last month, Grofers got a funding of Rs. 400 crore ($60 million) from SoftBank and the New-York-based fund Tiger Global (both were existing investors), and Yuri Milner, a Russian tech billionaire. This funding valued Grofers at $300 million — a drop of 20% as compared to its previous round of funding in 2015 when it raised $120 million. According to media reports, last year Grofers was looking to merge with BigBasket. There was also speculation of Flipkart acquiring Grofers. In a recent media interview, Grofer’s co-founder and CEO Albinder Dhindsa said they want to be independent, for now. Will the Walmart-Flipkart deal, if it happens, make them change their minds?

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